SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
- ----- Exchange Act of 1934 for the quarterly period ended September 30, 1999 or
Transition report pursuant to Section 13 or 15 (d) of the Securities
- ----- Exchange Act of 1934 for the transition period from to .
------- ------
Commission file number 0-17099
HOME PORT BANCORP, INC.
------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 04-3016821
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
104 Pleasant Street
Nantucket, Massachusetts 02554
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(508) 228-0580
(Issuer's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months ( or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
The number of shares outstanding of each of the registrant's classes of
common stock as of September 30, 1999:
Common Stock $.01 par value 1,841,890
--------------------------- --------------------
(Title of Class) (Shares Outstanding)
Transitional Small Business Disclosure Format (check one)
Yes No X .
----- -----
<PAGE>
Home Port Bancorp, Inc.
<TABLE>
<CAPTION>
INDEX
PART I FINANCIAL INFORMATION Page No.
-----------
<S> <C>
Item 1 Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998. 3
Consolidated Statements of Earnings for the three months and nine months 4
ended September 30, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for 5
the nine months ended September 30, 1999 and for the year ended
December 31, 1998
Consolidated Statements of Cash Flows for the nine months 6
ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis of Financial Condition and results of 10-16
Operation
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION 18
Signatures 19
</TABLE>
<PAGE>
Home Port Bancorp, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(In Thousands, Except Share and Per Share Data) September 30, December 31,
1999 1998
(unaudited)
-------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 11,438 $ 12,070
Interest bearing deposits in banks 75 54
Federal funds sold 3,000 -
-------------------------------
Total cash and cash equivalents 14,513 12,124
Securities held to maturity (market value $16,831 and $18,050) 17,050 17,904
Securities available for sale (amortized cost of $16,525 and $7,969) 16,290 7,993
Loans, net of allowance for loan losses of $3,909 and $3,145 (note 3) 249,766 213,899
Loans held for sale 10,074 16,005
Stock in FHLB-Boston, at cost 4,477 3,276
Land, buildings and equipment, net 2,192 1,721
Accrued income receivable 1,438 1,340
Net deferred tax asset 455 421
Prepaid expenses and other assets 1,079 887
-------------------------------
Total assets $317,334 $275,570
===============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 4) $240,434 $188,668
Borrowed funds 45,360 58,921
Accrued expenses 3,198 3,132
Other liabilities 1,839 817
-------------------------------
Total liabilities 290,831 251,538
-------------------------------
Commitments and contingencies (notes 3 and 5)
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued
- -
Common stock, $.01 par value, 10,000,000 shares authorized, 2,325,494
shares issued 23 23
Additional paid-in capital 17,473 17,473
Retained earnings 13,545 10,918
Accumulated other comprehensive income, net:
Unrealized gain on securities available for sale, net of taxes (note 2) (141) 15
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
-------------------------------
Total stockholders' equity 26,503 24,032
-------------------------------
Total liabilities and stockholders' equity $317,334 $275,570
===============================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Earnings (Unaudited)
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $5,003 $4,580 $14,867 $12,863
Interest on securities 408 312 1,116 969
Dividends 74 52 198 144
Federal funds sold and interest bearing deposits 16 61 28 72
-------------------------- -------------------------
Total interest income 5,501 5,005 16,209 14,048
-------------------------- -------------------------
Interest expense:
Interest on deposits 1,501 1,437 4,303 4,000
Interest on borrowed funds 751 711 2,736 2,360
-------------------------- -------------------------
Total interest expense 2,252 2,148 7,039 6,360
-------------------------- -------------------------
Net interest income 3,249 2,857 9,170 7,688
Provision for loan losses 50 38 150 113
-------------------------- -------------------------
Net interest income after provision for loan losses 3,199 2,819 9,020 7,575
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) Three Month Ended Nine Month Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Non interest income:
Deposit servicing fees 119 119 372 340
Loan servicing fees 88 58 229 174
Other fees and income 206 78 402 229
Net gain from sale of mortgage loans 38 63 244 104
Net loss from securities - - - (5)
-------------------------- -------------------------
Total non interest income 451 318 1,247 842
-------------------------- -------------------------
Non interest expense:
Salaries and employee benefits 876 821 2,531 2,198
Building and equipment expenses 200 163 576 461
Deposit insurance fees 16 13 48 41
Professional fees 68 160 314 450
Loss on "check-kiting", net of recovery - - - 460
Other 409 370 1,073 958
-------------------------- -------------------------
Total non interest expense 1,569 1,527 4,542 4,568
-------------------------- -------------------------
Income before income taxes 2,081 1,610 5,725 3,849
Provision for income taxes 721 562 1,994 1,337
========================== =========================
Net Income $1,360 $1,048 $3,731 $2,512
========================== =========================
Earnings per common share - basic and diluted $0.74 $0.57 $2.03 $1.36
=====================================================
Weighted common shares outstanding - basic and diluted 1,842 1,842 1,842 1,842
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders
Stock Capital Earnings Stock Income Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $23 $17,473 $7,017 $(4,397) $(13) $20,103
Net income - - 3,551 - - 3,551
Other comprehensive income, net
Change in unrealized gain on - - - - 7 7
securities available for sale ----------------
Comprehensive income 3,558
Cash dividends paid at
$.80 per share - - (1,474) - - (1,474)
-----------------------------------------------------------------------------
Balance at December 31, 1998 $23 $17,473 $10,918 $(4,397) $15 24,032
Net income - - 3,731 - - 3,731
Other comprehensive income, net
Change in unrealized gain on - - - - (156) (156)
securities available for sale ----------------
Comprehensive income 3,575
Cash dividends paid at
$.60 per share - - (1,104) - - (1,104)
-----------------------------------------------------------------------------
Balance at September 30, 1999 $23 $17,473 $13,545 $(4,397) $(141) $26,503
=============================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net income $3,731 $2,512
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Provision for loan losses 150 113
Depreciation of building and equipment 274 218
Net gain on sale of mortgage loans (244) (104)
Net loss on securities 0 5
Net amortization of securities premiums 4 23
Amortization of deferred loan origination fees (190) (172)
Amortization of deferred premiums on loans sold 42 24
Net increase in accrued income receivable (98) (183)
Net increase (decrease) in accrued expenses 66 1,177
Net (increase) decrease in loans held for sale 6,133 (5,405)
Net increase in prepaid expenses and other assets (192) (74)
Net increase (decrease) in other liabilities 1,022 (856)
Net increase (decrease) in deferred income taxes 69 (40)
--------------------------------
Net cash (used in) provided by operating activities 10,767 (2,762)
--------------------------------
Cash flows from investing activities
Purchases of securities held to maturity (2,912) (6,446)
Purchases of securities available for sale (10,103) (5,325)
Proceeds from sales of securities available for sale 1,370 950
Proceeds from maturities/calls of securities 1,660 7,930
Principal payments on mortgage-backed securities 2,279 1,591
Net increase in loans (35,827) (35,745)
Purchases of land, buildings and equipment (745) (381)
Purchase of Federal Home Loan Bank stock (1,201) (834)
--------------------------------
Net cash used in investing activities (45,479) (38,260)
--------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 51,766 57,541
Federal Home Bank advances 15,000 13,000
Federal Home Loan Bank repayments (23,000) (7,795)
Net increase (decrease) in short term borrowings (5,561) (9,516)
Cash dividends paid (1,104) (1,105)
--------------------------------
Net cash provided by financing activities 37,101 52,125
--------------------------------
Net increase (decrease) in cash and cash equivalents 2,389 11,103
Cash and cash equivalents at beginning of period 12,124 5,106
--------------------------------
Cash and cash equivalents at end of period $14,513 $16,209
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $7,031 $6,370
Income taxes 2,051 505
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unaudited Interim Information for September 30, 1999
1. Consolidated Financial Statements
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements of the Company as of and for the year
ended December 31, 1998. These financial statements include the accounts of Home
Port Bancorp, Inc. ("The Company"), its wholly owned subsidiary, Nantucket Bank
("the Bank") and the Bank's wholly-owned subsidiaries N.B. Securities, Inc.
("Securities") and N Realty Corp. ("Realty").
In the opinion of management, the unaudited consolidated financial statements
presented herein reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. Interim results are not
necessarily indicative of results to be expected for the entire year.
2. Comprehensive Income
The following table shows the components of other comprehensive income (in
thousands).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Net income $3,731 $2,512
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period (156) 51
Add: reclassification adjustment for losses included in
net income, net of taxes of $- in 1999 and $3 in 1998 - 7
--------------- ----------------
(156) 58
--------------- ----------------
Comprehensive Income $3,575 $2,570
=============== ================
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
3. Loans, Net (in thousands)
The composition of the balances of loans is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Mortgage loans:
Residential $153,015 $120,744
Residential construction 42,347 44,609
Commercial 48,603 42,439
Commercial construction 3,260 8,142
----------------- -----------------
Total principal balances 247,225 215,934
Less:
Due borrowers on uncompleted loans
Residential (9,961) (12,134)
Commercial (943) (2,379)
Deferred loan origination fees (795) (734)
----------------- -----------------
Total mortgage loans 235,526 200,684
Other loans:
Commercial business 12,029 10,791
Second mortgage 1,680 1,731
Home equity 2,859 1,521
Passbook and stock secured 789 592
Consumer 792 1,725
----------------- -----------------
Total other loans 18,149 16,360
Less: Allowance for loan losses (3,909) (3,145)
================= =================
Loans, net $249,766 $213,899
================= =================
</TABLE>
The Federal Home Loan Bank ("FHLB") has a blanket lien covering residential
mortgage loans as collateral for the Bank's borrowing from the FHLB.
A summary of the transactions in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Balance at beginning of period $3,145 $2,609
Provisions 150 113
Recoveries 624 393
Realized losses charged to allowance (10) (16)
-----------------------------
Balance at end of period $3,909 $3,099
=============================
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
<TABLE>
<CAPTION>
Non-performing loans are summarized as follows:
Sept. 30, December 31,
1999 1998
-------------------------------
<S> <C> <C>
Loans accounted for on a non-accrual basis $ - $ -
Accruing loans 90 days past due 9 268
Impaired loans - -
</TABLE>
4. Deposits (in thousands)
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------
<S> <C> <C>
Demand (non-interest bearing) $23,527 $18,437
Savings:
NOW 63,794 43,062
Regular and 90-day notice accounts 22,432 19,168
Money market deposit accounts 49,730 38,377
Advance payments from mortgagors 252 231
---------------------------------
Total savings 136,208 100,838
---------------------------------
Time certificates of deposit 80,699 69,393
---------------------------------
Total deposits $240,434 $188,668
=================================
</TABLE>
5. Commitments
In the normal course of business, there are outstanding commitments that are not
reflected in the balance sheet. Firm commitments to originate mortgage and
commercial loans were $15.2 million at September 30, 1999.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1999
Preliminary Note in Regard to Forward-looking Statements. This quarterly report
on Form 10-QSB contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements, within the meaning of Section 27A of
the Securities Act of 1933, as amended. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the registrant's actual results to differ materially
from those contemplated by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Certain
Factors That May Affect Future Results." These and other risks are also detailed
from time to time in the registrant's filings with the Securities and Exchange
Commission.
Certain Factors That May Affect Future Results. The following important
factors, among others, could cause actual results to differ materially from
those contemplated by forward-looking statements made in this Form 10-Q or
presented elsewhere by management from time to time. Defined terms used
elsewhere in this quarterly report have the same meanings herein as therein. A
number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the Bank's continued ability to
originate quality loans, fluctuating interest rates, real estate market
conditions on Nantucket, general and local economic conditions, the Bank's
continued ability to attract and retain deposits, new accounting pronouncements,
Year 2000 compliance and changing regulatory requirements.
Consolidated Balance Sheet
--------------------------
Total assets of Home Port Bancorp, Inc. (the "Company") grew during the first
nine months of 1999, increasing $41.8 million, or 15.2%, to $317.3 million at
September 30, 1999 from $275.6 million at December 31, 1998. For the comparable
period in 1998, total assets increased $55.0 million, or $26.3%. Major balance
sheet categories are discussed in detail below.
Net loans outstanding (including loans held for sale) were $259.8 million at
September 30, 1999, an increase of $29.9 million, or 13.0%, from $229.9 million
at December 31, 1998. For the comparable period in 1998, loans increased $41.3
million, or 23.6%, to $216.2 million from $174.9 million at December 31, 1997.
Mortgage loan originations totaled $124 million during the first nine months of
1999 compared to $114 million in the prior year period. Loan sales increased to
$41 million during the first nine months of 1999 as compared to $29 million for
the corresponding 1998 period. The increase in loan originations is attributed
to strong real estate sales activity on Nantucket and the Bank's emphasis on
customer service and marketing efforts. The Bank's lending activities are
conducted solely on Nantucket Island.
<PAGE>
Total deposits increased by $51.8 million, or 27.4%, to $240.4 million at
September 30, 1999 from $188.7 million at December 31, 1998. During the first
nine months of 1998, deposits increased by $57.5 million, or 40.4%. These
increases in deposits are attributed to a very strong Nantucket economy and the
Bank's marketing efforts. Substantially all of the Bank's deposits are from
Nantucket-related individuals, businesses and government entities. Brokered
deposits, a minor funding source, totaled $.5 million at September 30, 1999, or
less than one-half of one percent of total deposits.
Borrowed funds, consisting of Federal Home Loan Bank advances, totaled $45.4
million at September 30, 1999, an decrease of $13.6 million from the December
31, 1998 total of $58.9 million. At September 30, 1998 borrowed funds totaled
$37.4 million compared to $41.7 million at December 31, 1997. These borrowings
are used to fund loan growth and seasonal deposit outflows.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
Total stockholders' equity increased by $2.5 million to $26.5 million at
September 30, 1999 from $24.0 million at December 31, 1998. This increase
reflects net income of $3.7 million less cash dividends declared of $1.1 million
and less an increase in the unrealized loss on securities held to maturity of
$156 thousand.
Results of Operations
---------------------
For the quarter ended September 30, 1999, the Company reported net income of
$1.4 million or $0.74 per share compared to net income of $1.0 million or $0.57
per share for the quarter ended September 30, 1998. For the nine months ended
September 30, 1999 net income totaled $3.7 million, or $2.03 per share, compared
to $2.5 million, or $1.36 per share, for the comparable 1998 period.
Earnings for the three and nine months ended September 30, 1998 were impacted by
two non-recurring items that occurred in the prior year: a loss, and subsequent
partial recovery, from a check-kiting scheme and one-time expenses related to
the formation of a real estate investment trust subsidiary. Excluding these two
items net income increased by $201 thousand, or 17.3% in the third quarter and
$697 thousand, or 23.0%, for the year-to-date period, as compared to the prior
year. The following paragraphs describe the results of operations in more
detail.
<PAGE>
Net Interest Income
Net interest income increased $392 thousand, or 13.7%, and $1.4 million, or
19.1%, respectively, for the three and nine months ended September 30, 1999 as
compared to the prior year. These increases were the result of an increase in
the average volume of loans and deposits together with a small increase in the
interest rate spread. Additional information on average balances, interest and
yields, calculated on a tax-equivalent basis, is provided in the following two
tables:
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended Sept. 30, 1999 Nine Months Ended Sept. 30, 1998
----------------------------------------- ----------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (1) (2) Rate Balance (1) (2) Rate
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Residential loans $180,130 $9,933 7.35% $146,754 $8,290 7.53%
Commercial loans 64,956 4,519 9.28% 56,527 4,143 9.77%
Consumer loans 5,688 415 9.73% 5,789 430 9.90%
----------------------------------------- ----------------------------------------
Total loans 250,774 14,867 7.90% 209,070 12,863 8.20%
Securities and FHLB Stock 30,496 1,342 5.87% 26,561 1,246 6.25%
----------------------------------------- ----------------------------------------
Total interest earning assets $281,270 16,209 7.68% 235,631 14,109 7.98%
----------------------------------------- ----------------------------------------
Interest bearing liabilities:
Deposits 170,227 4,303 3.20% 150,472 4,000 3.55%
Borrowed funds 66,109 2,736 5.51% 51,737 2,360 6.10%
----------------------------------------- ----------------------------------------
Total interest bearing liabilities 245,336 7,039 3.82% 202,209 6,360 4.21%
----------------------------------------- ----------------------------------------
Net interest income $9,170 $7,749
============== ============
Interest rate spread 3.86% 3.77%
============ ============
Net interest margin 4.35% 4.38%
============ ============
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
(1) Tax-equivalent adjustment has been included in the calculations to reflect
this income as if it had been fully taxable. The tax-equivalent adjustment
is based upon the applicable federal and state income tax rates. The FTE
adjustment included in interest income was $90 thousand in 1999 and $61
thousand in 1998.
(2) Average balances include the assets held for sale, available for sale and
held to maturity.
The effect on net interest income as a result of changes in average interest
rates and balances follows:
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended September 30, 1999 vs. 1998
--------------------------------------------------------------
Changes Due to Increase
(Decrease)
--------------------------------------------------------------
Average
Average Average Rate/
Total Balance (1) Rate (2) Volume (3)
---------------------------------------------------------------
Interest earning assets:
<S> <C> <C> <C> <C>
Residential loans $1,643 $1,885 $(198) $(44)
Commercial loans 376 618 (208) (34)
Consumer loans (15) (7) (7) (1)
---------------------------------------------------------------
Total loans 2,004 2,496 (413) (79)
Securities FHLB Stock 96 184 (76) (12)
---------------------------------------------------------------
Total interest earning assets 2,100 2,680 (489) (91)
---------------------------------------------------------------
Interest bearing liabilities:
Deposits 303 766 (395) (68)
Borrowed funds 376 658 (229) (53)
---------------------------------------------------------------
Total interest bearing liabilities 679 1,424 (624) (121)
===============================================================
Net interest income $1,421 $1,256 $135 $30
===============================================================
</TABLE>
(1) Represents the changes in average balance multiplied by prior period yield.
(2) Represents the changes in yield multiplied by prior period average balance.
(3) Represents the changes in yield multiplied by changes in average balance.
<PAGE>
Non-interest income
Non-interest income increased by $133 thousand and $405 thousand, respectively,
in the three and nine month periods ended September 30, 1999 as compared to the
prior year. The three-month period increase is due to increases in the volume of
deposits and ATM usage. The nine-month period increase is due to increases in
the volume of deposits and ATM usage plus higher levels of gains on the sale of
loans. The increase in gains was due to an increase in the amount of loans sold
to $40.8 million in the first nine months of 1999 from $34.3 million in the
prior year.
Non-interest expense
Non-interest expenses were impacted by two non-recurring items that occurred in
the prior year: a loss, and subsequent partial recovery, from a check-kiting
scheme and one-time expenses of $341 thousand related to the formation of a real
estate investment trust subsidiary. Excluding these two items, non interest
expenses increased by $213 thousand, or 15.7%, and $775 thousand, or 20.6%,
respectively, in the three and nine month periods ending September 30, 1999 as
compared to the prior year. These increase are due to the costs associated with
additional office space leased during the second quarter of 1998 and additional
staffing to service the increased loan and deposit business. The Company's
efficiency ratio, excluding the non-recurring costs, was 43.6% for the
nine-month period ended September 30, 1999, compared to 44.1% in the 1998
period.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
Return on Equity
Return on average equity increased to an annualized rate of 19.2% for the nine
months ended September 30, 1999 from 13.23% for the same period in 1998. This
increase is the result the increase in earnings described above and was impacted
by the non-recurring check-kite loss in the 1998.
Provision for Loan Losses
The allowance for loan losses at September 30, 1999 was $3.9 million or 1.48% of
total loans compared to $3.1 million, or 1.35% of total loans, at December 31,
1998. During the nine months ending September 30, 1999 the loan loss reserve
increased by $764 thousand due to net recoveries of $614 thousand and a loan
loss provision of $150 thousand. The loan loss provision was increased to $50
thousand per quarter beginning in 1999 from $37 thousand per quarter during 1998
due to the growth in the Bank's loan portfolio. The Bank believes its current
level of loan loss reserves to be adequate. Any unforeseen future economic
problems, however, could lead to the Bank experiencing additional delinquencies
that may require additional provisions for loan losses.
Non-performing Loans and Other Real Estate Owned
The Bank's non-performing loans totaled $9 thousand at September 30, 1999
compared to $268 thousand at December 31, 1998. None of these loans were to
affiliated persons. At both September 30, 1999 and December 31, 1998 the Bank
had no other real estate owned. The Bank had no loans that were considered
impaired at either September 30, 1999 or December 31, 1998.
At September 30, 1999 management has identified $593 thousand of loans that,
while currently performing, may pose potential problems due to some doubts about
the ability of the borrowers to comply with all of their present loan repayment
terms. The resolution of these loans is not yet known. The Bank believes that
its allowance for loan losses is adequate to absorb any losses that may result
from these loans.
Income Taxes
The Company's effective income tax rate for the quarter ended September 30, 1999
was 34.6% compared to 34.9% for the quarter ended September 30, 1998. For the
nine months ended September 30, 1999 the effective tax rate was 34.8% compared
to 34.7% in the comparable 1997 period. These tax rates are reflective of the
proportion of income earned by certain non-bank subsidiaries that is taxed, for
state tax purposes, at lower rates.
<PAGE>
Liquidity and Capital Resources
All of the Company's funds are generated through its banking subsidiary,
Nantucket Bank. The Bank's sources are customer deposits, amortization and
payoffs of loans, advances from the Federal Home Loan Bank of Boston, sale of
loans in the secondary market, maturities and sales of securities and positive
cash flows generated from operations. As a member of the Depositors' Insurance
Fund, the Bank also has a right to borrow from the Depositors Insurance Fund for
short-term cash needs by pledging certain assets, although it has never
exercised this right. The Bank's liquidity management program is designed to
assure that sufficient funds are available to meet its daily needs.
The Bank believes its capital resources, including deposits, scheduled loan
repayments, revenue generated from the sales of loans and securities, unused
borrowing capacity at the Federal Home Loan Bank of Boston, and revenue from
other sources will be adequate to meet its funding commitments.
At September 30, 1999 and December 31, 1998 the Company's and the Bank's capital
ratios were in excess of regulatory requirements.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires an entity to recognize all derivatives as either assets
or liabilities in balance sheet and measure those instruments at fair market
value. Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. In June 1999 the
FASB issued Statement No. 137 which defers the effective date of Statement No.
133. Statement No. 133 is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. This statement is not expected to have a
material effect on the Company's consolidated financial statements.
Year 2000 Readiness
This report has been issued under the guidelines of the "Year 2000 Information
and Readiness Disclosure Act of 1998" ("Act") and should be viewed within the
guidelines of the Act regarding the Year 2000 problem in general and the Bank's
efforts to address the Year 2000 problem.
<PAGE>
The Company and the Bank are subject to the regulations of the Federal Reserve
Bank, the Federal Deposit Insurance Corporation (FDIC) and the Federal Financial
Institutions Examination Council. These agencies have issued Year 2000 (Y2K)
Guidelines that establish minimum standards for safety and soundness and
describe certain essential steps that each supervised financial institution must
take to become Year 2000 ready. The Guidelines require a bank to:
o ensure the involvement of the Board of Directors and management in
the institution's Year 2000 efforts,
o adopt a written project plan,
o renovate its mission-critical systems,
o complete tests of the renovated mission-critical systems by specific
deadlines,
o plan for contingencies, and
o manage customer risk.
The following paragraphs describe the Company's current status as regards to the
Y2K issue. Both the Company's and the Bank's Year 2000 efforts are contained in
the Bank's Y2K Project Plan (Plan). The Plan addresses both information
technology (IT) and non-information technology (non-IT) systems. Substantially
all of the software used by the Bank is provided by outside vendors.
Mission-critical on-line transaction processing and data warehousing services
are provided by a data processing vendor. Other, less critical, systems are
supported by purchased applications software. The Bank has and will continue to
utilize both internal and external resources to complete its Y2K remediation
efforts.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
State of readiness:
The Bank's Plan includes an assessment of its computer hardware and software
systems and vendor supplied systems. The Plan was developed along the five phase
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997 which consisted
of: Awareness, Assessment, Renovation, Validation and Implementation. The Bank
is continually evaluating mission-critical vendor plans and monitoring project
milestones for all systems.
For IT systems, the Bank has completed the Awareness, Assessment and Renovation
phases. The Bank continues to work closely with the vendor (NCR Corporation)
that supplies it's mission-critical data warehousing and on-line transaction
processing system. The Bank has performed tests of this system to determine its
Y2K compliance and has not uncovered any Y2K-related failures. The Bank made
certain changes to this system in the second quarter of 1999, for reasons
unrelated to Y2K compliance. The Bank tested these changes early in the third
quarter to ensure the system is compliant with Year 2000 requirements.
Other mission-critical IT systems have been validated and implemented. The Bank
will continue testing throughout 1999 as systems changes are made to ensure that
systems remain Year 2000 compliant.
The Bank has also addressed the Year 2000 readiness of embedded microcontrollers
in non-IT systems. Such embedded microcontrollers have been evaluated by an
outside expert and, where necessary, replaced with Y2K compliant versions.
Costs to address Year 2000 issues:
Included in other non-interest expenses for the nine months ended September 30,
1999 are charges totaling approximately $52 thousand, consisting of consulting
fees and depreciation expense, incurred in order for the Bank's computer systems
to properly function properly in the year 2000. The total remaining cost of the
Year 2000 project is estimated at approximately $42 thousand. It is not
anticipated that material incremental costs will be incurred in any single
period. The Company will continue to utilize both internal and external
resources to update, replace, develop and test all software information systems
for Year 2000 modifications. In most instances, upgrades to computer hardware
and software have been made to improve the capacity and performance of the
systems as well as to achieve Year 2000 compliance. Maintenance and modification
costs will be expensed as incurred.
<PAGE>
The vast majority of internal costs relate to the payroll cost for staff
assigned to the Y2K project team and Bank personnel assigned to testing the
changes resulting from Y2k efforts. These costs are not being separately tracked
and are not included in the costs cited in the preceding paragraph.
The costs of the project and the date on which the Bank plans to complete Year
2000 testing are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. Actual results could vary significantly from such estimates once
detailed testing is completed. If the resolution plan is unsuccessful, it may
have a material, adverse effect on the Company's future operating results and
financial condition
Risks of Year 2000 issues:
While the Bank is working closely with its significant third party vendors,
there can be no guarantee that the systems of these vendors, or other companies,
on which the Bank's systems rely, will be fully Year 2000 complaint. Therefore,
the Bank could possibly be negatively impacted to the extent other entities not
affiliated with the Bank are unsuccessful in properly addressing their
respective Year 2000
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Unaudited Interim Information for September 30, 1999
compliance responsibilities. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Contingency planning:
The Bank has developed a Year 2000 Contingency Plan (the "Plan") that outlines
the procedures to be followed in the event that any mission critical systems
fail after January 1, 2000. This Plan incorporates certain elements of the
Bank's Disaster Recovery Plan. The Plan includes the possibility that the Bank
would not be able to process customer transactions through its internal on-line
system for a period of time - which management believes would not be excessive -
following December 31, 1999 and for an inability to furnish customer statements
on a timely basis in January 2000. The inability to process transactions on-line
would have a limited impact on the operations of the Bank because, historically,
transaction volumes are lower during the winter months. A delay in mailing
account statements would have a negative impact on the Bank's reputation, but in
light of the growing public awareness of the Year 2000 crisis, management does
not believe that the impact would be material. The contingency plan is expected
to be revised and updated throughout the remainder of 1999 in response to
ongoing Year 2000 developments. The Plan has been substantially validated;
additional testing and employee training will continue over the rest of the
year, with the bulk of the work scheduled in the fall, after the Banks seasonal
decrease in transaction volumes.
The Year 2000 Committee of the Bank continues to review areas of concern
including the Bank's reliance on third-party vendors who supply the Bank with
critical applications. These crucial third parties include utility companies
(Nantucket Electric and BellAtlantic), Automated Teller Networks
(Express24/NYCE), the Federal Funds Transfer System (FedWire) and the Federal
Home Loan Bank of Boston . The Bank's daily interaction with each of these third
parties is crucial to many of the Bank's functions and the loss - even for a
short period of time - of any or all could materially impact the Bank's short
term profitability.
The Company has entered into a forward commitment with the Federal Home Loan
Bank of Boston to obtain funding of $15 million during the period immediately
before and after December 31, 1999. The purpose of this forward commitment is to
ensure the Bank's liquidity in view of the uncertainties surrounding the Year
2000 issue.
<PAGE>
Impact on major deposit and loan customers:
The Bank has assessed the impact of the Year 2000 issue on its major loan and
deposit customers. Certain borrowers and depositors that could potentially
experience a significant disruption in their business due to a Year 2000 failure
have been identified. The potential impact on depositors has been considered in
the Bank's liquidity plan for 1999 and 2000.
An overall assessment of the Y2K readiness of the Bank's commercial loan
customers was completed in 1998, with an overall assessment of low. The Bank
will continue to monitor its larger commercial loan relationships through its
loan review process and direct contact with individual customers. Also, the
Bank's policy is to include a Y2K analysis on new and renewed credits as part of
the underwriting decision process. No credit losses have been incurred by the
Bank to date as a result of the Year 2000 issue.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Quantitative and Qualitative Disclosures about Market Risk
The response is incorporated herein by reference from the discussion under the
sub-caption "Asset/Liability Management and Market Risk" of the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 8-9 of the Company's 1998 Annual Report.
There has not been a significant change in market risk since the fiscal year
ended December 31, 1998.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company and its subsidiaries are not involved in any
pending legal proceedings other than those involved in the
ordinary course of their businesses. Management believes that
the resolution of these matters will not materially affect
their businesses or the consolidated financial condition of
the Company and its subsidiary.
Item 2. Changes in Securities.
----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information.
------------------
A cash dividend of $.20 per common share was declared on July
23, 1999. The dividend was paid on August 27, 1999 (to
shareholders of record as of August 13, 1999.
Declaration of dividends by the Board of Directors depends on
a number of factors, including capital requirements,
regulatory limitations, the Company's operating results and
financial condition and general economic conditions.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits - None
b. Reports on Form 8-K - No reports on Form 8-K were
filed during the quarter ended September 30, 1999.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Signatures
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Home Port Bancorp, Inc.
------------------------------------------------
(Registrant)
Date: October 29, 1999 By: /s/ William P. Hourihan, Jr.
------------------------------------------------
William P. Hourihan, Vice President
Date: October 29, 1999 By: /s/ John M. Sweeney
------------------------------------------------
John M. Sweeney, Treasurer
(chief financial & accounting officer)
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